Monday, August 2

Splurging Consumers: Are They Cash Crazy?

Consumer Spending
Bloomburg Businessweek calls it the new abnormal. Americans, they say, are broke and depressed but also buying $3 lattes and waiting in line for iPhones. The compelling Businessweek cover story provides plenty of examples, including a woman who explained how tough the economy was while splurging in Las Vegas.

A few numbers behind the article citing the new abnormal.

• Businessweek cites the success of companies like Apple, Starbucks, Mercedes-Benz, and BMW.
• 17 percent of consumers are spending outside their means; 20 percent struggle with needs and wants.
• 20 percent of Americans have bought something in the last 30 days they wouldn't have 6 months ago.
• 51 percent of Americans have fallen behind on their their annual savings plans, but still splurge shop.

Some of these percentages certainly seem far off from the report that The Futures Company put out last year. That think piece, A Darwinian Gale, said that consumers had reshaped their entire thinking, with an emphasis on responsibility, vigilance, resourcefulness, prioritization, and network orientation. In March, another study from Euro RSCG Worldwide, said there were more prosumers than ever before.

Have consumers gone crazy, trading in the "new" society for schizophrenic shopping?

They aren't crazy. Devin Leonard touches on some of it in the podcast, but doesn't go deep enough in understanding consumers, especially those who are broke or feel stressed by the lackluster economy and low consumer confidence.

It's not impulsive shopping as much as it is backlash against the pressure of isolation, intense savings, and preparation for the worst (which he does say). But even more importantly, most consumers, especially those who had not faced any hardships in previous economic downturns, splurge now and again because they remain unbalanced.

This is one of the reasons most financial planners I know always suggest building entertainment in to a budget, no matter how small that budget might be. Simply put, it's little luxuries (scalable to our financial picture) that help lift our spirits up and keep us moving forward. It may also represent a re-prioritization to a mindset that tip earners tend to have all their lives.

Flexible ShoppingSince tip earners have unfixed incomes, they tend to avoid fixed expenses such as magazine or newspaper subscriptions. They also cut back on other fixed expenses as they can, such as grocery shopping or gas consumption or premium cable. Why? So they feel like they have more control over their daily finances even if that means they purchase something some would consider "luxurious."

The same psychology played out during the Great Depression. Despite being the worst economic collapse in the nation's history, this era also helped launch the major motion picture industry. The same psychology prompted hungry children in Europe during World War II to buy candy instead of soup if they happened to find a few cents. And the same psychology may have even been present during the Renaissance, when theater for the masses become an important part of life.

For a few minutes (if it's a cup of coffee) or a few hours (if it's a movie) or a few weeks (if it's an iPad), consumers can take the edge off a repressive economy and chronic uncertainty. And the need to do so grows exponentially if they didn't balance out their finances prior to the crash, which increases the pressure to splurge rather than spend a smaller amount on themselves every week or every month.

Marketers can empower consumers with fewer fixed costs.

Does this change how consumers spend? Sure. From a big picture perspective, it skews purchases much like the Businessweek article says. However, it tends to be for very different reasons. This behavior isn't a new abnormal. It's very normal. And as long as consumers can limit the pendulum swing between feast and famine, it might even be healthy too.

The question marketers ought to be asking themselves is how do they adjust their message to meet the mood? Some might make the mistake of cutting prices. But others will likely find some lift in removing "fixed" costs and giving consumers more flexibility.

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